Office properties being marketed for sale are up compared to this time last year, and roughly 10 percent higher than North Texas has seen at any point over the last five years.
“Currently, there are almost 600 office properties in Dallas-Fort Worth being marketed for sale, which total 11,063,686 square feet. This is much higher than [this time in] 2017 when 473 properties were listed for sale for a total of 8,232,695 square feet,” Younger Partners Research Director Steve Triolet says. “When you’re talking about 600 properties, there’s a 1 or 2 percent change everyday, but the main thing to consider is that there’s 3 million square feet of additional product above what was on the market last year.”
Not only is that 11 million square feet above the five-year average, but you’d have to go back to 2010 to see more than 10 million square feet being marketed for sale at any given point in time. So, why is this happening?
For one thing, Triolet says investors have a big appetite—and not just for large, well-occupied buildings in hot submarkets, such as AT&T’s Whitacre Tower, which went up for sale earlier this month. “We’re seeing appetite for buildings that have higher vacancy, and a value-add component. As the market heats up, people are willing to take more risk,” Triolet says.
Several buildings with above-average vacancy have traded in the last few quarters, such as 901 W. Walnut Hill Ln. in late 2017, International Plaza I & II (formerly occupied by JPMorgan Chase and Fannie Mae) in April 2018, Cottonwood Office Centre (formerly occupied by Liberty Mutual) sold in April 2017. Younger Partners is currently marketing 2100 Tower at 2100 Valley View Lane in Farmers Branch for sale, which has an occupancy of 65 percent.
Plus, as Marcus & Millichap First Vice President and District Manager Tim Speck says, it’s a seller’s market. “Absorption of office space has been very good, and that has resulted in a pretty good increase in rent. We’ve seen rents go up 25 percent. If you have rents going up 25 percent in five years, and we’ve seen the price per square foot for transactions go up more than that—a little over 30 percent. So owners who have owned for a long time, they have ability to get out now and make money.”
It also serves to keep in mind that of all the offices being marketed for sale, many will not end up trading, Speck says. “Yes, you have more people looking at taking something to the market, but a lot of that is just people kicking the tires. I don’t think the number of transactions will be up [for example] 25 percent this year. … Because of the favorable market, many owners are hoping to get a certain number.”
A building Marcus & Millichap just closed, Danari Office Park in Richardson, is a good example. The undisclosed California owner sold to an undisclosed local investor, who plans to update the 11,000-square-foot office to increase occupancy. “As a marketplace, we for sure wouldn’t have traded close to the number we ended up selling for. The owner wasn’t thinking they would necessarily get out. Without investor activity and interest, historically that property wouldn’t have traded.”
Marcus & Millichap, which tracks office sales greater than $1 million, has seen around 300 trades per year in the recent past. Speck expects office sales greater than $1 million to be up around the 330 or 340 in 2018.